Fred and Frieda have always wanted to enter the blueberry business. They locate
ID: 2625597 • Letter: F
Question
Fred and Frieda have always wanted to enter the blueberry business. They locate a 50-acre piece of hillside in Maine that is covered with blueberry bushes. They figure that the annual yield from the bushes will be 200 crates. Each crate is estimated to sell for $400 for the next 10 years. This price is expected to rise to $500 per crate for all sales from years 11 through 20.
In order to get started, Fred and Frieda must pay $150,000 for the land plus $20,000 for packing equipment. The packing equipment will be depreciated on a straight-line basis to zero estimate salvage value at the end of 20 years. Fred and Frieda believe that at the end of 20 years, they will want to retire to Florida and sell their property.
Annual operating expenses, including salaries to Fred and Frieda and exclusive of depreciation, are estimated to be $50,000 per year for the first 10 years and $60,000 thereafter. The land is expected to appreciate in value at a rate of 5 percent per year. The couple
Explanation / Answer
a)
intial investment = 150000 + 20000 = 170000
depriciation per year = 20000/20 = 1000
annual revenue for year 1-10 = 200 * 400 = 80000
annual cash flow for year 1-10 = (80000 -50000 -1000) * (1-0.3) + 1000 * 0.3 = 20600
annual revenue for year 11-20 = 200 * 500 = 100000
annual cash floe for yeat 11-20 = (100000 -60000 -1000) * (1-0.3) + 1000 * 0.3 =27600
terminal cash flow = 150000 * (1+0.05)^20 * (1-0.3) = 278596.26
NPV = -170000 + 20600 * PVIFA(13%,10) + 27600 * (PVIFA(13%,20) - PVIFA(13%,10)) + 278596.26/1.13^20
= -170000 + 20600 * 5.4262 + 27600 * 1.5986 + 278596.26/1.13^20
= 10078.30
since NPV is positive they should enter blue berry bussiness
b)
NPV = -170000 + 20600 * PVIFA(13%,10) + 27600 * (PVIFA(13%,20) - PVIFA(13%,10)) + 50000 * (1-0.3)/1.13^20
= -170000 + 20600 * 5.4262 + 27600 * 1.5986 + 278596.26/1.13^20
= -11061.54
since NPV is negatice they should not invest in land
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.